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Methodology Announcement:

Moody's updates its methodology for rating banks

 The document has been translated in other languages

09 July 2021


London, July 9, 2021 - Moody's Investors Service has published an updated methodology for banks, replacing the version from March 25, 2021.

In the update, Moody's has revised certain elements of its Advanced Loss Given Failure (LGF) framework. In particular, Moody's has adjusted the LGF notching guidance table thresholds for lower levels of subordination and volume in the liability structure and has modified its Advanced LGF framework to reflect the agency's view that for some banking groups, resolutions coordinated in a unified manner will be more common. Moody's has also broadened the application of the Advanced LGF framework with an amended description of the general characteristics of Operational Resolution Regimes (ORRs). In addition, Moody's has unified its treatment of Additional Tier 1 capital instruments (AT1s) within the LGF framework, removing the distinction between low- and high-trigger AT1s. The methodology update also extends the use of Advanced LGF analysis to all Canadian banks and introduces a single framework for rating all highly integrated related entities. Some limited text edits have been made to increase clarity.

Moody's expects that the implementation of these revisions will result in changes to instrument-level ratings and issuer-level ratings for about 12% of rated banking groups. Substantially all rating changes will be for banks in ORRs, i.e., in Western Europe, North America and Hong Kong. The majority of the expected ratings impact will reflect Moody's proposed revisions to Advanced LGF notching guidance, and the large majority of these rating changes will reflect single-notch upgrades of particular debt classes of an affected banking group.

Moody's expects the proposed change in treatment of AT1s will affect fewer than 3% of rated banking groups, the preponderance of which will see single-notch upgrades or downgrades for particular classes of debt.

For banking groups with entities subject to unified resolution, Moody's expects that the proposals will impact the ratings of about 20 multinational banking groups. These rating changes will include downgrades to instruments issued by parent banks or holding companies, primarily for deposits, senior unsecured and junior senior bank debt, most of which will be by one notch. Correspondingly, a number of subsidiary banks' debt ratings will likely be upgraded, again mostly by one notch.

Moody's does not expect to designate any new ORRs as a result of its proposed broader scope for determining whether a banking system is an ORR. Moody's expects that its proposals to broaden the scope of the Canadian ORR to non-systemic banks and to introduce a single framework for all highly integrated related entities will result in upgrades of one or two notches to fewer than ten issuers.

The methodology implements the approach proposed in two Requests for Comment (RFCs). The first RFC, called "Banks: Proposed Methodology Update" dated March 3, 2020, can be accessed via this link: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216107.

The second RFC, called "Banks: Proposed Methodology Update" dated April 8, 2021 , can be accessed via this link: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1271238 .

For the RFC dated March 3, 2020, Moody's received a total of 10 comments submitted through the Request for Comment page in response to this Request for Comment, for which eight respondents requested confidentiality. As a result, two of the comments are available for viewing as explained in the Results of Consultation called "Banks: Proposed Methodology Update" which can be accessed at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216109 .

For the RFC dated April 8, 2021, Moody's received a total of 12 comments submitted through the Request for Comment page in response to this Request for Comment, for which eight respondents requested confidentiality. As a result, four of the comments are available for viewing as explained in the Results of Consultation called "Banks: Proposed Methodology Update," which can be accessed at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1271243 .

This press release is not intended to provide a summary of the methodology. For a full explanation of the methodology, please consult the updated report called "Banks Methodology" now available on www.moodys.com and accessible at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625 .

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Simon James Robin Ainsworth
Associate Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Alexander Hendricks, CFA
Associate Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
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JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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